COVID-19 AND CONTRACT BREACH
With the American economy grinding almost to a halt due to the Covid-19 Virus and the accompanying onslaught on National, State and local directives and executive orders restricting, and in some cases, preventing the operation of many businesses, performance of contracts by the affected business owners has become all but impossible for reasons totally beyond their control.
These owners have contacts with key employees, contracts to supply goods, real estate leases requiring them to be open for business, contracts to manufacture and supply goods to others, franchise payments, product warranty repair claims in areas where travel is restricted, and the list goes on and on. The business owner asks “Am I liable for not doing something I can’t do, even if I want to do it”.
As with so many other things in the law, there is no bright line test to answer the question, its fact sensitive and more than one legal principle needs to be considered if the business owner is to be rescued from liability.
The law (and in most cases – Indiana) recognizes several defenses to enforcement of a contract against a party who, through no fault, cannot perform. In summary, these are (i) Force Majeure, (ii) Impossibility of Performance, (iii) Commercial Frustration and (iv) Impracticability of Performance. Of these defenses, only Force Majeure is a defense which must arise from the terms written into the written contract.
Force Majeure – Is Covid 19 an Act of God? Indiana has few cases discussing force majeure. A force majeure clause is a “contractual provision allocating the risk if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled.” (Black’s Law Dictionary 674 (8th ed. 2004).) The objective of a court when it interprets a contract with a force majeure provision, is to determine the intent of the parties at the time the contract was made by examining the language in the contract. The scope and effect of a force majeure clause depends on the specific contract language, and not on any traditional definition of the term. Specialty Foods of Indiana, Inc. v. City of S. Bend, 997 N.E.2d 23, 26–27 (Ind. Ct. App. 2013).
The most familiar description used in force majeure clauses is to waive performance due to “Acts of God”. Others include specific examples (“fires, floods, earthquakes, tsunamis, wars, terrorist attacks, strikes, civil unrest…”). Where the specific causes are listed and Acts of God are not included, the courts will tend to confine excusing performance unless it falls under one of the specific exceptions. While the facts of each case may vary, if due to government ordered restrictions, a business is closed, or employees cannot perform a required contract service, or an employer’s contract workers are shut out of a facility, or goods required for manufacture are not available, then in most circumstances, its highly likely a court would not find the business owner in breach of contract for failure to perform under a contract containing an Act of God exclusion in a Force Majeure clause.
Failure of Pre-Supposed Conditions: The Indiana Uniform Commercial Code (UCC) provides that a delay or failure to deliver goods by a seller which becomes impossible by the occurrence of a contingency (i.e. Covid-19) which the parties assumed would not occur at the time the contract was made or by compliance with any applicable governmental regulation or order is not actionable, even if the governmental regulation later proves to be invalid. IN Code § 26-1-2-615.
It’s hard to believe that an inability to source material or deliver to a restricted area, or be barred from operating a facility would not come under this section of the UCC, so a business owner with a contract that has no Force Majeure clause might well seek protection under this UCC section.
Frustration of Purpose: Frustration of Purpose occurs when the principal purpose of entering into a contract has been eliminated by a supervening event. There is some doubt that Indiana recognizes this doctrine. Ross Clinic, Inc. v. Tabion, 419 N.E.2d 219, 223 (Ind. Ct. App. 1981); Justus v. Justus, 581 N.E.2d 1265, 1275 (Ind. Ct. App. 1991).
Impossibility or Impracticability of Performance: Cases on this topic generally agree that unexpected difficulty, expense, or hardship involved in the performance of a contract does not excuse the maker from his obligation to perform.
Yet cases of objective impossibility, that is, impossibility arising from the nature of the thing to be done rather than impossibility arising out of the personal inability of the promisor tend to find favor in the courts. “impossibility” of performance” is regarded as including not only strict impossibility, but also “impracticability because of extreme and unreasonable difficulty, expense, injury or loss involved.” See Restatement, Contracts § 454; see also 84 A.L.R.2d 12.
Under the modern approach, whether a promisor’s performance becomes objectively impossible may depend upon whether the event producing the impossibility was or was not reasonably foreseeable when he entered into the contract. For example, where a fire destroyed the main building of a club, the contracted buyer could not escape the agreement to buy it as the possibility of a fire was foreseeable, even though the main building represented much of the deal value. Kruse, Kruse & Miklosko, Inc. v. Beedy, 353 N.E.2d 514, 542 (Ind. App. 1976) (of course the risk of fire damage is usually specified in a sale agreement as retained by a real estate seller until closing). Where one party had reason to know at the time of the contract it could not be performed, and the other party had no such knowledge, impossibility of performance was not allowed in settling an employment injury claim. Attempts to argue that significant escalations in the price of materials required to manufacture a product create “impossibility of performance” often fail, but in the case of Carona Virus and price gouging of some materials, this event may well be something that could not be readily foreseen and subject to the impossibility defense. Salary agreements with key executives requiring them to devote full time to a business may be impossible of performance where government ordered Carona virus shut downs prevent those employees from working so that the employer’s obligations to pay the contracted salary are waived due to impossibility of performance by the employees, even though nothing in the employment contract covers this circumstance. Each case where impossibility is a potential defense is intensely fact sensitive.
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